India undermines Wests Russian sanctions as Modi launches ‘rupee-ruble’ exchange scheme

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The deal would allow India to avoid the impact of western sanctions on Russia and continue buying Russian energy and other goods. The move risks undermining western nations such as the United States that have imposed unprecedented sanctions on Moscow in response to President Vladimir Putin’s invasion of Ukraine.

A senior banker briefed on the talks said the Reserve Bank of India (RBI) was consulting with the government and state-owned banks to assess the potential of a new rupee-rouble trade agreement.

Dr A Sakthivel, president of the Federation of Indian Export Organisations (FIEO), said: “We have requested the government to have [the rupee-rouble] arrangement. So [the] government is working on it. Very soon I think we’ll get this.”

Western countries such as the United States have imposed tough sanctions to limit international trade with Moscow in response to the conflict.

Russia’s central bank has been targeted and a number of its lenders cut off from the Swift financial payments system, and four of the country’s biggest banks have been hit with restrictions.

The penalties have served to isolate Moscow from global financial markets.

However, India has remained neutral and has not joined in imposing any sanctions against the country.

Delhi has longstanding ties with Moscow and is Russia’s biggest supplier of military equipment.

Prime Minister Narendra Modi has refrained from condemning the invasion and remained in close contact with President Putin, including over the evacuation of thousands of Indian students from Ukraine following Russia’s invasion.

India has also drawn criticism from the wider international community when it has repeatedly abstained from votes at the United Nations condemning the invasion.

On Tuesday, Ami Bera, an Indian-American member of the US Congress, warned: “India has a responsibility to ensure its actions do not directly or indirectly support Putin and his invasion”.

The rupee-ruble exchange scheme would risk outrage from the United States, undermining US sanctions. The US is India’s biggest export destination, buying over $50billion worth of Indian goods every year.

However, Moscow appears keen to continue trade with Delhi in the face of pressure from the West.

Speaking earlier this month, Russia’s ambassador to India, Denis Alipov, said that the two countries had ways of “co-operation and transactions independent of western […] financial mechanisms”. He added it was a “question of just adjusting”.

The two countries have a deal to boost bilateral trade to $30billon by 2025, up from $8billon in the 2021 financial year, according to India’s official statistics. India has a trade deficit with Russia, which it buys energy, fertilisers and precious jewels from. Indian exports to Russia are largely pharmaceuticals and military equipment.

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The new rupee-ruble pact would most likely be exercised through state-owned banks in both countries, such as State Bank of India’s Russian unit in Moscow, Commercial Indo Bank and Russia’s Sberbank, which has a bank in Delhi.

It would allow India’s banks to release money owned by Russian clients, who are not able to wire cash internationally because of the sanctions of the Swift payment system.

It would not be the first time India and Russia had launched a rupee-ruble exchange scheme. The Reserve Bank of India ran a similar exchange during the Cold War era which was in place from the 1970s until 1992

Sammy Kotwani, president of the Indian Business Alliance in Moscow, told the Financial Times that India could be looking to take advantage of the situation as Russia becomes increasingly isolated.

“Banks in India are still paranoid,” he said. But “if Europeans are going to close the door, somebody is going to open the door”, he added.

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